Figure 3 shows that 73 out of the 339 stocks (over 55% of the total net assets) held by health care ETFs and mutual funds get an attractive-or-better rating. However, only four out of 21 health care ETFs (less than 48% of total net assets) and 4 out of 92 health care mutual funds (less than 1% of total net assets) get an attractive-or-better rating.

Investors need to tread carefully when considering health care ETFs and mutual funds. ETF investors appear to be much more sophisticated than mutual fund investors as 48% of health care ETF assets are in the attractive-rated ETFs while 0% of mutual fund assets are the attractive-rated funds.

Amgen, Inc. (AMGN) is one of my favorite stocks held by health care ETFs and mutual funds and earns my very attractive rating. AMGN’s growth in after tax cash flows (NOPAT) is impressive: 15% CAGR since 1998. Despite this impressive track record, AMGN’s current price to economic book value ratio is only 0.7, which mean the current valuation of the stock implies AMGN’s NOPAT will permanently decrease by 30%. This disparity between past performance and expectations means excellent risk/reward for investors.

Sarapta Therapeutics (SRPT) is one of my least favorite stocks held by health care ETFs and mutual funds and earns my very dangerous rating. It currently has negative economic earnings, and a free cash flow yield of -11.1% is not exactly attractive. To justify its share price of ~$24.68, the company must grow revenues by 20% compounded annually for nearly 20 years while also raising its ROIC from -43% (as of fiscal year 2011) to +50%. Those are high expectations for a company with no recent history of economic profitability.

382 stocks of the 3000+ I cover are classified as health care stocks, but health care ETFs and mutual funds hold only 339 stocks.

Figures 4 and 5 show the rating landscape of all health care ETFs and mutual funds.